Joe Biden’s prospective Treasury secretary nominee, Janet Yellen, is a long-time supporter of government stimulus spending to spur recovery from recessions. Right now, she has supporters among both Republicans and Democrats in Congress, who agree that the economy needs hundreds of billions of dollars in additional stimulus and are only debating the size of the package.
But a fiscal stimulus in this particular recession is nonsense. Members of both parties seem to assume that the problem with our economy is insufficient spending money, or consumer demand. This is false. This is the most obviously supply-side recession in modern history. Many Americans (those lucky enough to still be working, that is) have the money and the will to buy things, but they can’t, because the coronavirus and the government response have caused stores, restaurants, planes, and more to shut down.
That’s not to say government aid isn’t necessary here. Congress must distinguish between “stimulus” — which is just pumping more money into the economy, say, in the form of checks given to every American — and “relief,” which aims to help those individuals who have suffered the most in the crisis. The government should not offer broad-based stimulus in the next bill, and should focus instead on targeted relief for those directly affected. Meanwhile, the only money that would truly stimulate the economy would be spent rolling out more vaccines, drugs, and tests.
Despite pleas from policymakers such as Federal Reserve chairman Jay Powell, the International Monetary Fund, and others, there is no evidence that Americans need more spending money in general. In every previous recession in the past 50 years, personal income either dropped or, at worst, stayed stable. By contrast, personal income jumped from an annual rate of $15 trillion to $17 trillion in April, the greatest jump in recorded history. It’s still higher today than it was before the beginning of the “recession.”
Yes, that income rose in part thanks to an early round of government spending. But today, even after the end of the previous stimulus, most Americans aren’t desperate for cash or dipping into their savings. In fact, the savings rate jumped from 7 percent in February to well over 20 percent just months later, and for the year will be the highest it has been since records have been kept.
Well, some people say, Americans are still refusing to spend that money. That is no longer true. Retail sales are above their February level, and recently saw their biggest jump in history. The remaining sectors that lag are precisely those still impacted by the coronavirus, such as restaurants, travel, and some types of manufacturing. More stimulus will do nothing to get those moving again.
We also know that stimulus is neither necessary nor sufficient for recovery. When Congress couldn’t agree on a new stimulus bill and the current version expired in August, the economy surged ahead faster. The reason was that we, at least, temporarily, had gotten the virus somewhat under control.
It makes little sense for the government both to tell us to stay home and then also try to shovel cash out with the demand that we spend more money at the places government closed. It’s like pushing on both the brake and the accelerator at the same time. The only effect of more stimulus will be to further distort the economy and to burden future generations with tremendous levels of debt.
The budget deficit for the fiscal year 2020 was $3.1 trillion, or over 15 percent of our whole economy. As many commentators noted, this was the largest deficit since World War II. Yet in that case we were spending our money to fight the war, a most necessary cause. In this case, we are spending a pittance to fight the virus itself, but are spending trillions giving bailouts to businesses and already-comfortable families.
But Congress can still spend some money productively. First, it should spend almost anything to control the virus. Even shortening the impact of the coronavirus by just two months could increase economic output by over $100 billion. Therefore, spending tens of billions on contact tracing or more expansive drug trials would stimulate the economy more than any cash program.
Yet the fact that the stimulus bill passed by the House in October proposes $350 million in fisheries support compared with only $1.5 million to the Food and Drug Administration to approve more drugs shows where Congress’s priorities lie.
Second, although in total Americans are earning more than before the coronavirus, many families have lost everything. Congress should aim to help those specific individuals who have lost jobs, businesses, or health coverage. But this is directed “relief,” not overall “stimulus” aimed at the whole economy.
Previous coronavirus bills, such as the March 2020 CARES Act, included a blend of both relief (extending the time for unemployment benefits) and stimulus (the $1,200 check given to almost every American).
The bill revealed by a bipartisan group of senators last week is better than previous versions, since it provides $16 billion for vaccine distribution and testing, and no checks to average Americans. But it also provides $160 billion in unnecessary stimulus money to state and local governments, and $288 billion to the Paycheck Protection Program, which funnels cash to small businesses. A recent study found that the program cost almost $225,000 per job saved, since so much of the money went to businesses that were open and successful.
America doesn’t need thousands of dollars going to already well-off middle-class families who can work from home, or to still-successful businesses. The problem today is “supply,” not “demand.” We need to help those who have lost jobs, and we need to control the virus. But we don’t need any more stimulus, and Congress should not provide it.